Feb 6 - Fitch Ratings has placed UK cable operator Virgin Media Inc.'s
(Virgin Media) 'BB+' Long-term Issuer Default Rating (IDR) on
Rating Watch Negative (RWN). A full list of rating actions is below.
The RWN follows the announcement by Liberty Global, Inc (LGI) and Virgin Media
that subject to shareholder and regulatory approvals, LGI will acquire Virgin
Media in a stock and cash merger. As a result of debt from acquisition financing
being pushed down to Virgin Media upon closing of the transaction, Fitch expects
the company's 2012 proforma net debt/EBITDA will increase to 4.3x from 3.3x.
- Two to Three Notch Downgrade Expected
Fitch expects to downgrade Virgin Media's Long-term IDR by two to three notches
upon completion of the transaction, due to the expectation of higher leverage.
We would expect Virgin Media's future financial policies to be similar to that
at other LGI subsidiaries, such as Telenet N.V. ('B+'/Stable), where shareholder
distributions could see leverage rising to 5.0x.
- Good Recovery Prospects
Recovery prospects for Virgin Media bondholders are good, in Fitch's view, given
the solid operational profile of the business. Based on the proposed transaction
structure with around GBP6.1bn of senior secured debt and finance leases, we
would expect to downgrade the rating of the company's senior secured bonds to
'BB+' (currently 'BBB-') and the senior unsecured rating to 'BB-' (currently
'BB+'), if Virgin Media's Long-term IDR was downgraded by two to three notches.
This initial assessment might change depending on the final mix of
secured/unsecured debt in Virgin Media's capital structure upon deal closing and
is contingent upon receipt of final documents confirming information already
received by Fitch.
- Solid Operational Profile
Virgin Media's 2012 results show that the company's operating and financial
results are in line with Fitch's forecasts. Over the medium term, we expect
Virgin Media to deliver increasing operating free cash flow, despite slowing
customer and revenue growth. This is underpinned by the company's key strength
as a "second-incumbent" in the UK, with its superior network infrastructure and
strong market share within its geographical footprint.
WHAT COULD TRIGGER A RATING ACTION?
- Two to three notch downgrade on the completion of acquisition of Virgin Media
by LGI, leading to net debt/EBITDA approaching 4.5x.
Positive rating action is currently not anticipated.
LIQUIDITY AND DEBT STRUCTURE
Virgin Media ended 2012 with GBP206m in cash. The proposed transaction is
complex and the amount of debt to be repaid and the final mix of bank, secured
and unsecured bond debt is still unclear.
FULL LIST OF RATING ACTIONS
Long-term IDR: 'BB+' placed on RWN
Short-term IDR: affirmed at B
Virgin Media Investment Holdings senior secured bank facilities 'BBB-' placed on
Virgin Media Secured Finance Plc 2018 and 2021 senior secured bonds 'BBB-'
placed on RWN
Virgin Media Finance Plc 2016 and 2019 senior notes 'BB+' placed on RWN
Fitch may have provided another permissible service to the rated entity or its
related third parties. Details of this service can be found on Fitch's website
in the EU regulatory affairs page.